An empirical study on New Zealand stock market efficiency with macroeconomic variables and other stock markets

Abstract

This thesis examines the relationships between the New Zealand Stock Exchange (NZSE) stock index and a set of macroeconomic variables, from January 1990 to January 2003, as well as among the stock indexes of New Zealand, Australia, Japan and the United States. By employing the Vector Error Correction Model (VECM) on the NZSE, this thesis shows that the NZSE40 is not a leading indicator for economic variables but is, however, cointegrated with a group of macroeconomic variables. We found there are negative relationships between the stock index and the inflation rate, money supply as well as the long-term interest rate. The relationships between the stock index and the real exchange rate movement, short-term interest rate, domestic retail oil price, as well as the real economic activity, are positive. The NZSE40 is found to be mainly determined by the interest rate, money supply and real GDP variables rather than the Exchange or inflation rates.
In addition, using Groenewold's (1997) method, the NZSE did not follow a semi-strong form of efficiency while the Australian Stock Exchange did follow both a weak and semi-strong form of efficiency. We found there were positive relationships between the New Zealand and Australian as well as Japanese stock indexes but the relationship between the New Zealand and the US stock index was negative.... [Show full abstract]

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